DOW INDUSTRIALS HIT NEW HIGHS -- BANKS LEAD FINANCIALS HIGHER -- LENNAR LEADS BIG BOUNCE IN HOMEBUILDERS -- RATE BOUNCE AFTER FED MEETING PUSHES DOLLAR HIGHER AND GOLD LOWER -- RISING SHORT-TERM RATES CAN BE GOOD FOR STOCKS
DOW INDUSTRIALS JOIN TRANSPORTS IN NEW HIGHS... Chart 1 shows the Dow Transports hitting another record high today, and remaining the strongest of the three Dow averages. Today's rally was led by rails and delivery services. Fedex gained 3.5% to lead the latter group higher. Chart 2 shows the Dow Industrials finally hitting a new record high as well. Today's upside breakout by the industrials confirms the earlier bullish breakout in the transports. The Dow's rally was led by a 4.9% jump in DuPont. Other Dow leaders were Home Depot, American Express, Pfizer, and Goldman Sachs. Chart 3 shows the Dow Utilities lagging behind the other two Dow averages. That's mainly due to the recent uptick in long-term bond yields which has caused some profit-taking in rate-senstive sectors of the market like utilities and REITS.
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Chart 1
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Chart 2
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Chart 3
BANKS LEAD FINANCIALS HIGHER... Financial stocks were among the day's biggest leaders. Chart 4 shows the Financial SPDR (XLF) moving to a new multi-year high. The XLF/SPX ratio (above chart) has been rising for a month. Banks were a big part of today's financial gains. Chart 6 shows the PHLX Bank Index (BKX) hitting a new six-month high today. Arthur Hill has noted that the recent uptick in Treasury yields may be giving a boost to bank stocks.
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Chart 4
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Chart 5
HOMEBUILDERS SURGE ON LENNAR ... A big jump in Lennar's earnings pushed that stock sharply higher and all other homebuilder along with it. Chart 6 shows Lennar (LEN) surging more than 5% and in very heavy trading. That puts the homebuilding leader well above moving average lines. Chart 5 shows the Dow Jones Home Construction (iShares) climbing above its 200-day moving average as well -- also in heavy trading.
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Chart 6
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Chart 7
RATES CLIMB AFTER FED MEETING ... Although today's Fed announcement didn't really change anything, the financial markets continued to anticipate higher U.S. rates. Chart 8 shows the 5-Year Treasury Note Yield climbing close to its yearly high. The 10-Year T-Note yield also bounced. The widening spread between U.S. and foreign yields continues to support the dollar. Chart 9 shows the Dollar Index hitting a new recovery high. That pushed most commodity prices lower. The orange bars in Chart 9 shows the Gold Trust (GLD) falling to a new low.
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Chart 8
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Chart 9
RISING RATES AREN'T ALWAYS BAD... Chart 10 shows the 2-year Treasury Yield recently hitting a three-year high. Its yield of .55 is well below the 10-Year Yield of 2.60%. The two-year yield would have to climb above the 10-year to signal danger for the stock market. That's not likely to happen for a long time. History also suggests that when the Fed does finally start to raise short-term rates, stocks usually continue to rise. Sam Stovall of Standard & Poors was quoted in Barrons over the weekend to the effect that the S&P 500 rises 2.6% on average in the six months following the first Fed rate hike, and 6.2% higher over the following 12 months. It's not a bad thing when rates start rising from historically low levels when that rise is being caused by a stronger economy. It can be a bad thing when rates are rising from higher levels because of a threat from rising inflation. So far, the former scenario best describes the current situation. There just aren't any signs of rising inflation anywhere. With the rising dollar putting downside pressure on commodities, any inflation threat is being pushed further into the future. Ms. Yellen said today that the Fed won't start rising the Fed funds rate until it believes the economy is strong enough to handle it. That will be like telling a sick patient that he's strong enough to stop taking his medicine. That's usually good news.
